A little light shed on the dark art of short-selling
Betting on the downside is seldom disclosed
Up to 1.32%, or R115-billion, of the JSE’s Top 40 shares are in the hands of short-sellers, showing that the market was a fertile ground for risky bets long before it became fashionable for hedge funds to release negative reports about a company and further depress its shares.
Household names such as Mediclinic International, Anglo American, Shoprite and Woolworths have between 1% and 5% of their shares out on loan to short-sellers, with Anglo and Mediclinic suffering the same fate in the UK, where a public register shows nine funds are shorting the companies.
Short-selling has recently come under the spotlight after US-based Viceroy Research released a damning report shortly after retailer Steinhoff International admitted to accounting irregularities, without specifying them. Viceroy’s report touched on some of these irregularities.
Last week, 36One Asset Management stepped forward as the author of an anonymous report criticising the Resilient group of companies, which include the Fortress Income Fund, Hammerson, and Nepi Rockcastle.36One said it has shorted Resilient. It is engaged in a public standoff with its board, which it says has denied it access to its upcoming results presentation, according to Moneyweb. Resilient said 36One has refused an opportunity to meet privately.
But any concerns with the Resilient stable are not new. Hammerson, which is also listed in the UK, has been targeted by short-sellers in that country as far back as 2014, according to the public filings. On the JSE, Fortress B shares were sold short before any short positions appeared in Resilient.
“There are always bears and expensive stocks, and Steinhoff, Resilient, Fortress are all Top 40 stocks under known short reports,” said Simon Brown, founder of investment education platform JustOneLap. “Most shorts are hedge funds and they keep quiet about shorts. They do the minimum disclosure documents because they have to. But other than that, my experience is that they are very slow to talk up their shorts.”
This is apparent in fund manager BNP Paribas Asset Management’s response to questions about why the group is shorting Anglo American.“As we are part of a larger integrated banking and financial services group, here at BNP Paribas Asset Management we have a policy of not discussing individual equity holdings in order to avoid compromising any relationships that may exist elsewhere within the group,” said spokesperson Quintin Smith.
The exception to the rule – such as 36One and Viceroy – is a new development, akin to the brash style adopted by US fund managers such as Bill Ackman, whose Pershing Square hedge fund has accused nutrition company Herbalife of being a pyramid scheme and took a large short position in the company.
“The response to Capitec/Viceroy suddenly has people interested because frankly it may help your cause and drive prices lower,” said Brown. “I think we’ll see more of it, even if cloaked in the ‘it was leaked by error’ style for now.”
Steinhoff is still among the JSE’s most-heavily shorted companies as measured by the number of shares out on loan to short-sellers – with some funds still waiting for the share price to hit zero.
Investment holding company Brait, which acquired the UK’s New Look for £780-million in 2015 but had to mark the value of this asset down to zero last year, and miner Impala Platinum complete the list of Top 40 stocks with just under 10% of issued shares out on loan.